SUI Group Holdings Ltd. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. In addition, unless expressly stated otherwise, the comparisons presented in this MD&A refer to the same period in the prior year. Our MD&A is presented in seven sections: ● Overview ● Portfolio and Investment Activity ● Results of Operations ● Financial Condition ● Critical Accounting Estimates ● Off-Balance Sheet Arrangements ● Forward Looking Statements OVERVIEW Mill City Ventures III, Ltd. was incorporated in the State of Minnesota on January 10, 2006. In this report, we generally refer to Mill City Ventures III, Ltd. in the first person “we.” On occasion, we refer to our company in the third person as “Mill City Ventures” or the “company.” We are engaged in the business of providing short-term non-bank lending and specialty finance solutions to companies and individuals, generally on a secured basis. The loans we provide typically have maturities that are nine months or shorter, highly illiquid, and ordinarily involve a pledge of collateral or, in the case of loans made to companies, personal guarantees by the principals of the borrower. Our loans may be made for real estate acquisitions, renovation and sale, or other projects relating to real estate, title loans, inventory needs, inventory financing, solve for short-term liquidity needs, or for other similar purposes. We intend to remain opportunistic, however, and may occasionally engage in transactions that involve our acquisition of other rights (such as stock, warrants or other equity-linked investments) or that are structured differently or uniquely. Our business objective is to generate revenues from the interest and fees we charge, and capital appreciation from any related investments we make. Our principal sources of income are interest and fees associated with our loans such as origination fees, closing fees or exit fees. In connection with the short-term non-bank specialty finance loans we provide, we may receive reimbursement of legal costs associated with loan documentation. We occasionally derive income from dividends paid on equity securities we hold from time to time, or from the sale of our equity securities. Our statement of operations also reflect increases and decreases in the carrying value of our assets and investments (i.e., unrealized appreciation and depreciation). Our principal expenses relate to operating expenses, the largest components of which are generally professional fees, payroll, occupancy, and insurance expenses. Our MD&A should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2023, as well as our reports on Forms 10-Q and 8-K and other publicly available information. All amounts herein are unaudited. In addition, the following discussion of our results of operations and financial condition should be read in the context of this overview. PORTFOLIO AND INVESTMENT ACTIVITY During the six months ended June 30, 2024, we made $973,438 of investment purchases and had $5,461,479 of redemptions and repayments, resulting in net investments at amortized cost of $14,460,679 at the end of the period. During the six months ended June 30, 2023, we made $8,900,500 of investment purchases and had $9,149,194 of redemptions and repayments, resulting in net investments at amortized cost of $16,552,481 at the end of that period. 17 Table of Contents Our portfolio composition by major class, based on fair value at June 30, 2024, was as follows: Investments at Fair Value Percentage of Fair Value Short-term Non-banking Loans $ 12,929,985 100.0 % Total $ 12,929,985 100.0 % RESULTS OF OPERATIONS Our operating results for the three and six months ended June 30, 2024 and June 30, 2023 were as follows: For the Three Months Ended June 30, For the Six Months Ended June 30, 2024 2023 2024 2023 Investment Income: $ 888,629 $ 907,502 $ 1,721,296 $ 1,771,530 Operating Expenses: (398,059 ) (570,045 ) (759,146 ) (2,461,862 ) Net Investment Gain (Loss) $ 490,570 $ 337,457 $ 962,150 $ (690,332 ) Investment Income We generate revenue primarily in the form of interest income derived from the short-term non-banking loans we provide, together with fees we charge in connection with those loans, such as commitment, origination, structuring, diligence, or consulting fees. Any such fees will be recognized as earned. In some cases, the interest payable to us on the short-term loans we provide may accrue or be paid in the form of additional debt. The principal amount of the debt instruments, together with any accrued but unpaid interest thereon, will generally become due at the maturity date of those debt instruments. On occasion, we may also generate revenue from dividends and capital gains on equity investments we make, if any, or on warrants or other equity interests that we may acquire. For the three and six months ended June 30, 2024, our total investment income was $888,629 and $1,721,296, respectively. For the three and six months ended June 30, 2023 our total investment income was $907,502 and $1,771,530, respectively. Our loan portfolio generates interest income, with an average rate on the loans of 14.4%. Professional Fees For the three and six months ended June 30, 2024, we had $174,098 and $312,469 professional fees expense, respectively. For the three and six months ended June 30, 2023, we had $287,325 and $417,176 professional fees expense, respectively. The decrease is due to the decrease in loan activity during the current year. Payroll and Directors Fees For the three and six months ended June 30, 2024, we had $145,859 and $296,925 of payroll expense, respectively, and we had $30,000 and $60,000 of directors fees, respectively. For the three and six months ended June 30, 2023, we had $147,161 and $1,277,600 of payroll expense, respectively, and we had $30,000 and $562,968 of directors fees, respectively. The increase in 2023 over 2024 is due to a stock option issuance recognized in January 2023. Interest Expense For the three and six months ended June 30, 2024, we had $0 and $320 of interest expense, respectively. For the three and six months ended June 30, 2023, we had $43,333 and $78,000 of interest expense, respectively. The decrease is due to the termination of the line of credit agreement in January 2024. Net Realized Gain (Loss) from Investments For the three and six months ended June 30, 2024, we had $5,152,682 and $5,461,479, respectively, of sales of investments resulting in $346,745 and $371,240 of realized gains, respectively. For the three and six months ended June 30, 2023, we had $5,204,194 and $9,149,194, respectively, of sales of investments resulting in $41,371 of realized gains and $558,629 of realized losses, respectively. Net Change in Unrealized Appreciation (Depreciation) on Investments For the three and six months ended June 30, 2024, our investments had $289,641 and $237,890 of unrealized depreciation, respectively. For the three and six months ended June 30, 2023, our investments had $21,107 of unrealized depreciation and $627,316 of unrealized appreciation, respectively. The decrease is due to the sale of appreciated stock during the current year. 18 Table of Contents Changes in Net Assets from Operations For the three and six months ended June 30, 2024, we recorded a net increase in net assets from operations of $412,936 and $795,039, respectively. Based on the weighted-average number of shares of common stock outstanding for the three and six months ended June 30, 2024, our per-share net increase in net assets from operations was $0.06 and $0.12, respectively. For the three and six months ended June 30, 2023, we recorded a net increase in net assets from operations of $70,721 and a net decrease in net assets from operations of $647,323, respectively. Based on the weighted-average number of shares of common stock outstanding for the three and six months ended June 30, 2023, our per-share net increase in net assets from operations was $0.01 and our per share net decrease in net assets from operations was $0.10, respectively. Cash Flows for the Six Months Ended June 30, 2024 and 2023 The level of cash flows used in or provided by operating activities is affected primarily by our provision of short-term loans, purchases of other investments, redemptions and repayments of our loans or investments, and other related factors. For the six months ended June 30, 2024, net cash provided in operating activities was $5,048,587. Cash flows provided in operating activities for the six months ended June 30, 2024 were primarily related to the funding of our short-term loans and purchases of investments aggregating $973,438, offset mostly by redemptions and repayments of short-term loans and investments totaling $5,461,479. For the six months ended June 30, 2023, net cash provided in operating activities was $11,886. Cash flows used in operating activities for the six months ended June 30, 2023 were primarily related to the funding of our short-term loans and purchases of investments aggregating $8,900,500, offset mostly by redemptions and repayments of short-term loans and investments totaling $9,149,194. FINANCIAL CONDITION As of June 30, 2024, we had cash and cash equivalents of $5,424,611, an increase of $5,048,587 from December 31, 2023. The primary use of our existing funds and any funds raised in the future is expected to be for our investments in portfolio companies or for other general corporate purposes, including paying for operating expenses or debt service to the extent we borrow or issue senior securities. Pending investment in portfolio companies, our investments may consist of cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment, which we refer to collectively as “temporary investments.” CRITICAL ACCOUNTING ESTIMATES Our financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, or U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Critical accounting policies are those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In preparing the financial statements, management will make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. In preparing the financial statements, management also will utilize available information, including our past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality. Actual results will almost certainly differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses. As our expected operating results occur, we will describe additional critical accounting policies in the notes to our financial statements. Our most critical accounting policies relate to the valuation of our portfolio investments, and revenue recognition. For more information, refer to our Annual Report on Form 10-K for the year ended December 31, 2023. OFF-BALANCE-SHEET ARRANGEMENTS During the six months ended June 30, 2024, we did not engage in any off-balance sheet arrangements as described in Item 303(a)(4) of Regulation S-K. 19 Table of Contents FORWARD-LOOKING STATEMENTS Some of the statements made in this section of our report are forward-looking statements based on our management’s current expectations for our company. These expectations involve assumptions and are subject to substantial risks and uncertainties that could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements. Forward-looking statements relate to future events or our future financial performance, and can ordinarily be identified by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar words. Important assumptions include our ability to identify and consummate new investments, achieve certain margins and levels of profitability, the availability of any needed additional capital, and the ability to maintain compliance with regulations applicable to us. Some of the forward-looking statements contained in this report relate to, and are based our current assumptions regarding, the following: ● our future operating results; ● the success of our investments; ● our relationships with third parties; ● the dependence of our success on the general economy and its impact on the industries in which we invest; ● the ability of our portfolio companies to achieve their objectives; ● our expected financings and investments; ● our regulatory structure and tax treatment; ● the adequacy of our cash resources and working capital; and ● the timing of cash flows, if any, we receive from our investments. The foregoing list is not exhaustive. For a more complete summary of the risks and uncertainties facing our company and its business and relating to our forward-looking statements, please refer to our Annual Report on Form 10-K filed on April 2, 2024 (related to our year ended December 31, 2023) and in particular the section thereof entitled “Risk Factors.” Because of the significant uncertainties inherent in forward-looking statements pertaining to our company, the inclusion of those statements should not be regarded as a representation or warranty by us or any other person that our objectives, plans, expectations or projections that are contained in this filing will be achieved in any specified time frame, if ever. We undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date of this filing. The forward-looking statements made in this report relate only to events as of the date on which the statements are made, and are excluded from the safe harbor protection provided by Section 21E of the Securities Exchange Act of 1934.